Finance Committee Chairman Max Baucus (D., Mont.) said through a spokesman Tuesday that he and his staff "are looking at it right now." His comments follow a Wall Street Journal article detailing how companies can write off losses from settlements of investigations -- including many government probes.

If Congress adopts legislation, it would close a loophole that allows companies to recoup part of the payments they make to settle allegations of wrongdoing. That could represent a substantial additional penalty for companies caught in the current wave of scandals, including Enron Corp. and WorldCom Inc., but also many of the Wall Street firms that advised them.

Tax experts say, for example, that under current rules,
Merrill Lynch
& Co. likely will be able to write off the cost of a recent $100 million settlement with New York's attorney general. That could save it $30 million, making taxpayers an unwilling party to the agreement. The investigation involved allegations that Merrill Lynch promoted stocks the company expected to underperform in order to win investment-banking business. Merrill declined to comment on a potential write-off.

But committee officials emphasized that they have reached no decisions. A potential problem is figuring out where to draw the line. Lots of companies settle lawsuits that their executives legitimately believe have no merit.

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With corporate wrongdoing likely to dominate the political agenda in Washington for the remainder of the year, tightening limits on deductibility is a distinct possibility. One option would be to limit deductibility of settlements with the government while continuing to allow write-offs of shareholder litigation and other private suits.

Currently, Congress prohibits only deductions of government fines and penalties, along with some damages from antitrust cases and out-and-out bribes. In practice, that means a lot of civil settlements with government agencies remain deductible. The Internal Revenue Service tries to distinguish between settlements with the government that are compensatory, and therefore deductible, and those that are punitive, and therefore aren't. But that standard is proving to be quite flexible.

In one case earlier this year, the IRS said that a civil penalty, "even if it is labeled a penalty, may be deductible if it is imposed to encourage compliance with the law or as a remedial measure to compensate another party."